Law firm goes under – OK, stop that giggling at the back….

We covered the takeover of consulting firm Monitor by Deloitte a while back after Monitor got into some financial difficulties.  Professional services has grown so much as a sector and a spend category over the last 20 years, and we’re used to legal and consulting firms, and their partners, making what seems like a lot of money to most mortals, so it comes as a bit of a shock to find they are just like any other business – they can get into trouble, have business or financial issues and even go bust.

The latest example is Cobbetts, a mid-sized law firm based in Manchester in the north west of England. Here was reporting on events last week.

Cobbetts is set to enter administration as the firm looks to secure a fire-sale of its business, marking the first failure of a major UK law firm since the fall of Halliwells in 2010. The Manchester-based firm has filed a notice of intention to appoint administrators and will look to sell off its business and assets as soon as possible. The firm, which has offices in Birmingham, Leeds and London, employs 492 staff and has 74 partners and posted revenues of £45.2m for the 2011-12 financial year.

The firm had refinanced £10M in loans and overdraft payments last year, had lost top partners to competing firms, and has been through three redundancy rounds before last week’s events. But it now looks like they will be rescued by another Manchester firm, DWF, who may buy Cobbetts in a “pre-pack” administration deal.  That may save a lot of the jobs and I guess give clients some continuity. The deal still has to be approved by the regulators, administrators KPMG and Cobbetts’ bank Lloyds, which is owed £10m and signed a debenture over the firm earlier in January.

Now this sort of provider getting into trouble is not perhaps as critical to a buyer as the same thing happening to a supplier of key factory components, or raw materials, or to a bespoke software supplier. But for some clients, who will have a lot of knowledge and experience embedded in Cobbetts and their staff, it may be at best inconvenient, and at worst will impact somewhat on their own business.

You do wonder though whether there is a flaw in the “partner” professional services model here. Shouldn’t a firm build up decent reserves over the good years so that there’s some protection when times get tough? Or is there too much pressure every year to pay out as much as possible to partners in order to keep everyone happy? And is there enough transparency to enable customers to know how stable and secure their providers really are?

After all, it was only last May that senior partner Stephen Benson announced apparently reasonably results and said: “These results provide the platform for consolidating our position as a regional leader and building on our successful and growing international work.”

So the lesson is, don‘t assume that your professional services providers are safe from normal business problems. As many are partnerships, they don’t have to be quite as open with their financial data as many “normal” limited companies or the equivalent. But you can ask directly for details before you award them contracts, you can make sure you get updates if they’re a key supplier or partner, and you can run Dun & Bradstreet (or similar) analysis and ongoing checks on them as well.

There’s another increasing risk to professional services providers and their soundness as well – that of major law suits when they‘re implicated in wider scandals and problems. HPs accusations about their acquisition of Autonomy comes to mind here, in terms of the involvement of audit and consulting firms. But that’s an issue for another day perhaps...

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  1. Janine Baker:

    Actually a shame from a procurement perspective that Cobbetts has gone, as they used to produce interesting Public Procurement Matters newsletters each quarter giving insight into latest cases.

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